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Local Banks See 13% Boost in Assets, Drop in Income

The county's 25 largest banks based here saw a decent boost in assets through June as they weathered a harsh economy.

The largest OC-based banks saw a 13% gain in assets for the 12 months through June, bringing their total assets to $7.1 billion, according to this week's Business Journal list.

Last year the top 25 banks on our list grew assets by 12%. The prior year they rose by 11%.

The list ranks banks by assets, including cash, loans and investments such as real estate and securities.

Financial information for the list comes from the Federal Deposit Insurance Corp.The increase this year comes as the local banks, which mostly deal with businesses as customers, are finding it more difficult to lend.

Many also say they've benefited from increased deposits from customers leaving larger or more unstable competitors. Some have seen jumps by taking over failed banks.

According to the list, 19 banks saw increased assets--two were up more than 100%--while six saw slight drops in assets.

Income was a different story as many local banks got hit with some bad commercial real estate loans that already had wended their way through larger rivals.

Fourteen of the banks lost money for the six months through June as they saw a lowered demand for loans and fewer numbers of credit-worthy businesses.

The group as a whole lost more than $23 million compared to a profit of more than $2 million a year earlier.

Most of the banks also are reporting lower return on asset figures, with an average return posted at a loss of 1.7%.

Stricter regulations led them to set aside more money to cover potential loan losses and increased fees to the FDIC for its bailout fund.

Core capital ratios, which measure the cushion the banks have from bad loans, came in at an average of more than 12%, which is considered healthy by regulators.

Low interest rates also have squashed earnings with banks making less on the loans that they do have out.

The top 25 local banks account for less than 5% of the $70 billion in deposits at banks operating in the county as larger national banks dominate the market.

The county's largest homegrown bank, Pacific Mercantile Bank in Costa Mesa, saw a 7.8% rise in assets to $1.2 billion.

Its lending was up about 3% to $815 million outstanding, while its deposits were up 20% to $936 million for the 12 months through June.

Chief Executive Ray Dellerba says the bank has continued to find opportunities in lending where some competitors have been more strained.

"We haven't changed our business model," he said. "That's not to say we haven't had a tough year."

The bank lost nearly $6.5 million for the first six months of the year, due mostly to having to set aside money to cover bad loans and fees to the FDIC.

So far this year, the bank has set aside more than $10 million to protect against bad loans, which totaled more than 4% of its assets in June, up from 1% from the previous year.

But Dellerba said he thinks the bank is at the point where the number of bad loans will begin shrinking.

The bank also had to spend more money to cover FDIC fees, which were up to $2.1 million from $500,000 a year earlier as the government looked to shore up its fund to relieve troubled banks.

The FDIC is considering having banks prepay these fees three years in advance. It should make a decision by December (see story, page 31).

"This is very expensive for a smaller bank," Dellerba said.

Pacific Mercantile's payouts contributed to a shrinking of its return on assets, which was negative 1.1%.

Meanwhile, the bank has been looking to raise $15.5 million in a private stock sale, which Dellerba says will go toward more lending.

In the past year, it hired about 50 people to expand its mortgage business, bringing its total to 160. That hiring burst offset other local employment losses, bringing the employment change in OC to 35 new positions for 1,024 total.

After posting a loss of $63,000 on last year's list, it posted a profit of $168,000 for the six months through June.

Its loan portfolio grew about $5 million to $596 million, while deposits rose by about $150 million to $551 million, a more than 30% rise.

Meanwhile, its bad loan count rose to more than 2% of assets from less than 1% a year ago.

Like Pacific Mercantile, it's looking to raise cash with a $20 million stock offering to offset bad loans and make new ones.

At the end of the third quarter, it had $2.4 million set aside for loan losses compared to $836,000 for the same time in the previous year.

No. 3 Sunwest Bank in Tustin shot up the ranks from No. 6 a year ago as it grew its assets with acquisitions by 54% to more than $467 million.

Last summer it took over failed MetroPacific Bank in Irvine, and this fall it nabbed First State Bank of Flagstaff in a government-brokered deal.

Net income at the bank grew 19% to nearly $1.5 million for the six months through June.

It also added 13 workers for a total of 83.

Bank President Glenn Gray says the bank is only casually looking at other takeovers.

"At this point, having more organic growth would be better," he said.

No. 4 American Security Bank in Newport Beach moved down a spot from last year as its assets fell by nearly 13% to $404 million.

Its loans outstanding fell by about 10% to $343 million, while its deposits also dropped 10% to nearly $350 million.

The bank also posted a loss of $1.2 million for the six months through June, compared to a profit of nearly $1.6 million a year earlier.

No. 5 Premier Commercial Bank in Anaheim held its rank as its assets grew nearly 3% to $398 million.

Net income for it was down 7% to $715,000.

The bank held on to its money because it avoided bad loans, but the tougher regulatory environment could continue eating away at its income as it sets aside more money for potential losses and higher fees, the bank said.

"Maybe it's an overreaction," said Ash Patel, the bank's president.

No. 7 First Security Business Bank in Orange moved up from No. 16 last year as it grew by 110% to $342 million in assets.

The bank is part of Santa Ana-based First American Corp., which has been restructuring its different business lines.

No. 8 California First National Bank in Newport Beach also rose sharply from No. 13 last year, growing its assets 54% to nearly $340 million.

The bank has a national focus and grew mostly from new loans as well as investments, according to President Peter Aharonyan.

Next year's list will include an acquisition from No. 10 CommerceWest Bank, which will add about $170 million in assets from San Marcos-based Discovery Bancorp.

The purchase puts it at about $422 million, which would have given it a No. 4 ranking this year.

With more failures expected, the list is likely to see even more adjustments next year.

Orange County Business Journal, Copyright (c) 2010, All Rights Reserved.

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